Traderight (NSW) Pty Ltd (ACN 108 880 968) and Ors v Bank Of Queensland Limited (ACN 009 656 740) (No 11) and 15 related matters
[2012] NSWSC 1196
•08 October 2012
Supreme Court
New South Wales
Medium Neutral Citation: Traderight (NSW) Pty Ltd (ACN 108 880 968) & Ors v Bank Of Queensland Limited (ACN 009 656 740) (No 11) and 15 related matters [2012] NSWSC 1196 Hearing dates: 4 October 2012 Decision date: 08 October 2012 Jurisdiction: Equity Division Before: Ball J Decision: Mr Gwynne's report be admitted into evidence.
Catchwords: EVIDENCE - expert evidence - whether report concerning potential value of a business in the future and its expected income admissible - discussion of role of expert in opinion for determining value of hypothetical business - held report admissible. Cases Cited: State of New South Wales v Moss [2000] NSWCA 133; (2000) 54 NSWLR 536 Category: Interlocutory applications Parties: Traderight (NSW) Pty Ltd (ACN 108 880 968) (First Plaintiff in 06/258216 and First Defendant in 06/258225)
Bronwyn Smith (Second Plaintiff in 06/258216 and Second Defendant in 08/258225)
Geoffrey Versace (Third Plaintiff in 06/258216 and Third Defendant in 08/258225)
Smith Partners Development Pty Ltd (Fourth Plaintiff in 06/258216)
Verich Holdings Pty Ltd (Fifth Plaintiff in 06/258216)
Bank of Queensland Limited (ACN 009 656 740 (Defendant in 06/258216; Plaintiff in 08/258225; Plaintiff in 08/279848; Defendant in 08/281332; First Defendant in 08/282126; First Defendant in 08/282304; First Plaintiff in 09/287360; Defendant in 09/287814; First Defendant in 07/256081; Fourth Defendant in 09/287816; First Defendant in 09/287824; Defendant in 10/304306; Defendant in 10/305568; Defendant in 10/306022; Defendant in 10/367086; Defendant in 10/367117)
SME Business Assist Pty Limited (ACN 108 524 232) (First Defendant in 08/279848; Tenth Defendant in 09/287360; First Plaintiff in 09/287814; Sixth Plaintiff in 07/256081)
Scott Rolfe McCoy (Second Defendant in 08/279848; Eleventh Defendant in 09/287360; Second Plaintiff in 09/287814; Seventh Plaintiff in 07/256081)
Geraghty & Palmer (NSW) Pty Ltd (First Plaintiff in 08/281332)
Shauna Margaret Geraghty (Second Plaintiff in 08/281332)
Barry Palmer (Third Plaintiff in 08/281332)
Rossmick No 1 Pty Limited (First Plaintiff in 08/282126; Second Defendant in 09/287360; First Plaintiff in 07/256081; First Plaintiff in 09/287816)
Rossmick No 2 Pty Limited (Second Plaintiff in 08/282126; Third Defendant in 09/287360; Second Plaintiff in 07/256081; Second Plaintiff in 09/287816)
Michael Bradley (Third Plaintiff in 08/282126; Fourth Defendant in 09/287360; Third Plaintiff in 07/256081; Third Plaintiff in 09/287816)
Ross Chapman (Fourth Plaintiff in 08/282126; Fifth Defendant in 09/287360; Fourth Plaintiff in 07/256081; Fourth Plaintiff in 09/287816)
Luke Nolan (Fifth Plaintiff in 08/282126; Sixth Defendant in 09/287360; Fifth Plaintiff in 07/256081; Fifth Plaintiff in 09/287816)
David Liddy (Second Defendant in 08/282126; Second Plaintiff in 09/287360; Second Defendant in 07/256081; First Defendant in 09/287816; Second Defendant in 09/287824)
Jude Financial Services Pty Ltd (ACN 115 763 481) (First Plaintiff in 08/282304; Seventh Defendant in 09/287360; Eighth Plaintiff in 07/256081; First Plaintiff in 09/287824)
Russell Jude Edward Gardner (Second Plaintiff in 08/282304; Eighth Defendant in 09/287360; Ninth Plaintiff in 07/256081; Second Plaintiff in 09/287824)
Penelope Ann Gardner (Third Plaintiff in 08/282304; Ninth Defendant in 09/287360; Tenth Plaintiff in 07/256081; Third Plaintiff in 09/287824)
Industrial Court of New South Wales (First Defendant in 09/287360)
Donna Quinn (Third Plaintiff in 09/287360; Third Defendant in 07/256081; Second Defendant in 09/287816; Fourth Defendant in 09/287824)
Gary Allsop (Fourth Plaintiff in 09/287360; Fourth Defendant in 07/256081; Third Defendant in 09/287816; Third Defendant in 09/287824)
Southpole Financial Services Pty Ltd (First Plaintiff in 10/304306)
Harunur Rashid Chowdhury (Second Plaintiff in 10/304306)
Iftekhar Tarek Hassan (Third Plaintiff in 10/304306)
Ikthedar Hassan Murad (Fourth Plaintiff in 10/304306)
Best Deal Pty Limited (ACN 119 366 433) (First Plaintiff in 10/305568)
Jeffrey Bruce Jones (Second Plaintiff in 10/305568)
LJH Group Pty Limited (ACN 123 507 497) (First Plaintiff in 10/306022)
Leslie Xu (Second Plaintiff in 10/306022)
Jin Yu Yang (Third Plaintiff in 10/306022)
Leokate Pty Ltd (ACN 111 162 068) (First Plaintiff in 10/367086)
Stephen Sargent (Second Plaintiff in 10/367086)
Lauren Sargent (Third Plaintiff in 10/367086)
Shamarbre Pty Ltd (First Plaintiff in 10/367117)
Ronald George Johnson (Second Plaintiff in 10/367117)Representation: NA Cotman SC with RD Glasson (OMB Parties)
S Couper QC with JV Gooley, GAF Connolly and RM Higgins (Bank Parties)
McCabes (OMB Parties)
HWL Ebsworths (Bank Parties)
File Number(s):
Judgment
Introduction
In the proceedings commenced by Best Deal Pty Limited and Mr Jones, the person behind Best Deal, Mr Jones claims damages from the defendants (the Bank) on the basis that, if he had not been induced by the Bank to incorporate Best Deal and to cause it to enter into a franchise agreement with the Bank, he would have continued to carry on business as a mortgage broker through a company controlled by him known as Umbrella Financial Services Pty Ltd (UFS). That company operated in partnership with another and placed its business through an aggregator called New Horizons Lending Pty Limited (NHL).
In support of that claim, Mr Jones seeks to tender an expert report prepared by Mr Gwynne, an accountant, concerning the value of that business and its expected income. The Bank objects to the tender of that report on two grounds. First, it submits that the conclusions reached by Mr Gwynne depend on a number of assumptions for which there is no evidence. Secondly, it submits that a number of conclusions reached by Mr Gwynne are based on matters which are not the subject of his expertise or for which no rational basis is identified.
The assumptions
It is not always easy to separate the two types of objection identified by the Bank. Many of the assumptions which Mr Gwynne makes are assumptions concerning a hypothetical state of affairs in the future and it is not clear whether Mr Gwynne has assumed that it is reasonable to make those assumptions or whether Mr Gwynne himself is expressing an opinion that the assumptions he has made are reasonable. Rather than attempt to separate the two types of objection, it is convenient to set out the principal assumptions which it is said Mr Gwynne is not entitled to make either because they are not the subject of evidence or because Mr Gwynne did not have the expertise or a rational basis for making them. Those assumptions are:
(a) That following the merger of NHL with a company called Astute Financial Management Pty Ltd (Astute), UFS would have continued to place business through the merged entity and continued to earn the same rates of commission as it had done before the business was sold;
(b) That the average loan life of the loans written by UFS for the years 2007 to 2010 would be the same as the average loan life of loans written by Australian Finance Group Limited as disclosed in its financial statements;
(c) That by March 2007, UFS would write 6 to 8 loans per month or, alternatively, 2.75 loans per month and that the number of loans written per month and the average value of loans written per month would increase by the rate of growth in loan commitments and loan sizes respectively as published by the Australian Bureau of Statistics (ABS);
(d) That an appropriate discount rate in calculating the present value of future commissions was 12.5 percent;
(e) That Mr Jones would employ an assistant from 2010 financial year initially part-time and full-time from 2013;
(f) That one of the usual ways of valuing a loan book in the industry was to pay a multiple of between 1.5 and 2.0 times the trailing commission derived over the previous 12 months. Another way to value a loan book was to calculate the present value of expected trailing commissions over the expected remaining life of the loan book;
(g) That expenses would increase annually in line with increases in the consumer price index for the years 2007 to 2010 and then at the rate of 2.5 percent per annum (which was the mid point of the Australian Government Treasury's long term target range of 2.0 percent to 3.0 percent).
Some general points
Before dealing with these specific assumptions, three general points should be made.
First, what Mr Gwynne's report is seeking to do is determine the value and income of a hypothetical business which it is said Mr Jones would have conducted if he had not entered into a franchise agreement with the Bank. Necessarily that makes any calculation of the damages claimed by Mr Jones difficult because it requires assumptions to be made about matters which cannot be known. That, however, is not a ground for refusing to award more than nominal damages. As Heydon JA explained in State of New South Wales v Moss [2000] NSWCA 133; (2000) 54 NSWLR 536 at [72]:
[T]he mere fact that the quantum of damages is difficult to assess does not mean that the plaintiff is only entitled to a nominal sum. This principle applies as much to the assessment of damages for impaired earning capacity in injured plaintiffs as it does to pecuniary loss caused by negligent advice (Bowen v Blair [1933] VLR 398) or to loss in the form of the diminished value of damaged property (Wheeler v Riverside Coal Transport Co Pty Ltd [1964] Qd R 113), or equitable damages (Talbot v General Television Corp Pty Ltd [1980] VR 224 at 250-1), or damages for breach of contract (Fink v Fink (1946) 74 CLR 127 at 143). In the last case, Dixon and McTiernan JJ put the following general proposition: "Where there has been an actual loss of some sort, the common law does not permit difficulties of estimating the loss in money to defeat the only remedy it provided for breach of contract, an award of damages." This was followed in Sellars v Adelaide Petroleum NL (1994) 185 CLR 332 at 349 per Mason CJ, Dawson, Toohey and Gaudron JJ. The same is true in tort. In Naylor v Yorkshire Electricity Board [1968] AC 529 at 548 Lord Devlin said: "in the law of damages ... difficulty in calculation is not ordinarily taken as a ground either for reducing or for increasing the award". The court will be more ready to shoulder the burden of acting without specific evidence where that evidence is difficult to call. In Biggin & Co Ltd v Permanite Ltd [1951] 1 KB 422 at 438, a sale of goods case involving a recovery in respect of damaged goods, Devlin J said: "It is only that where precise evidence is obtainable the Court naturally expects to have it. Where it is not the Court must do the best it can". As McPherson J said in Nilon v Bezzina [1988] 2 Qd R 420 at 424: "The degree of precision with which damages are to be proved is proportionate to the proof reasonably available".
One of the values of a report such as Mr Gwynne's is that it gives the court an understanding of the consequences of reaching certain conclusions relevant to the assessment of damages and in doing so assists the court in embarking on the process of doing the best it can to quantify the plaintiff's loss, assuming that the plaintiff otherwise makes out his case. The report itself should not necessarily be treated as a determination of the amount of those damages.
Second, in my opinion, in this case, the report prepared by Mr Gwynne clearly explains how he has gone about his valuation. He has identified the assumptions that he has made, the methodology he has used and has exposed his reasoning process. In many cases, Mr Gwynne explains the basis of the assumptions he has made, albeit in brief terms. As I have said, it is often not clear whether Mr Gwynne is making a true assumption concerning the reasonableness of adopting particular assumptions about a hypothetical future or whether he is himself expressing an opinion on the reasonableness of those assumptions. However, I do not think that prevents a reader from understanding what Mr Gwynne has done.
Third, and connected to the first point, the principal assumptions about which complaint is made, apart from the assumption concerning the selection of an appropriate discount rate, are all assumptions about what would have happened in a hypothetical future world. Necessarily, those assumptions cannot be the subject of direct evidence. Whether they are made out or not is ultimately a matter for the court having regard to the evidence together with what is inherently plausible. If the court is not willing to accept the assumptions, that will likely require an adjustment to the conclusions reached by Mr Gwynne. However, it is not a reason for rejecting the report.
It is against that background that the assumptions to which objection is taken need to be considered.
Assumption (a)
In my opinion, it is arguably reasonable to assume that following the merger between NHL and Astute, UFS would have continued to place business through the merged entity. In the absence of any other evidence, it might be inferred that the merged entity still had an interest in receiving business from all brokers with whom the merging entities dealt and in the absence of any evidence to the contrary, it might be inferred that the merged entity would be prepared to continue to pay commissions at the rate formerly paid by NHL. However, it may also be appropriate to discount the amount that is claimed to take account of the risk that the merged entity would not continue to deal with UFS. In the absence of evidence, the court will have to do the best that it can in assessing what discount, if any, may be appropriate. However, I do not regard that as a reason for rejecting Mr Gwynne's report.
Assumption (b)
As to the average loan life, for the period March to June 2006, Mr Gwynne has calculated the average loan life of UFS's loan book and used that figure. For the 2007, 2008, 2009 and 2010 financial years, he has used the average loan life of the loan book of Australian Financial Group Limited as disclosed in its financial records. For the years beyond that, he has used an average of those two averages. Mr Gwynne does not explain why he has used the average he has for 2007, 2008, 2009 and 2010. However, it is clear from his report what he has done and in my opinion that is a matter on which he can be cross-examined. I do not think that the absence of an explanation alone provides a reason for rejecting his report.
Assumption (c)
Mr Gwynne has prepared his report on two bases. One is on the assumption that UFS would write 7 loans per month. The other is on the assumption that it would write 2.75 loans per month. The first figure is based on evidence given by Mr Jones that he had taken time off from UFS's business to renovate his house, that following the completion of those renovations he would have devoted himself fulltime to that business if Best Deal had not become a franchisee of the Bank and that his aim in those circumstances would have been to place 6 to 8 loans per month. Whether that aim was achievable or not is clearly an issue in the case. However, I do not think any conclusion can be reached on that question until after Mr Jones is cross examined.
The alternative assumption used by Mr Gwynne is that UFS would write the same number of loans as it had written before Mr Jones commenced renovations on his home. In my opinion, that is an arguably reasonable assumption to make. Similarly, in my opinion, it is arguably reasonable to assume that Mr Jones would be able to grow UFS's business in line with rates of growth as published by the ABS and that the amount lent would also grow. If ultimately the court is not satisfied that those assumptions are reasonable, and Mr Jones otherwise makes out his case, then an adjustment will need to be made to the amount calculated by Mr Gwynne. However, I do not regard that as a reason for rejecting his report.
Assumption (d)
In my opinion, based on the available evidence, Mr Gwynne is qualified to express an opinion on an appropriate discount rate. The discount rate he has used is not obviously unreasonable. Moreover, he has explained how he has arrived at it, albeit very briefly. In my opinion, it is a matter on which he can be cross-examined.
Assumption (e)
The assumption that Mr Jones would employ an assistant is consistent with the assumption that Mr Jones would be able to grow his business.
Assumption (f)
Mr Gwynne identifies two methods for valuing a loan book. One is a multiple of trailing commissions for the previous 12 months. The other is a discounted cash flow valuation. Mr Gwynne considers both methods in reaching a valuation. Both methods produce similar results and he takes an average of the two to reach a conclusion concerning value.
In my opinion, Mr Gwynne appears to be qualified to express an opinion on the methods of valuing a loan book. There is a question whether he has adequately explained the basis for choosing a figure of 1.5 or 2 times the annual trailing commission. However, what he has done is clear. It is a matter on which he can be cross-examined. He has used another methodology which is not open to the same criticism. In those circumstances, I do not regard this as a ground for rejecting his report.
Assumption (g)
In my opinion, it is not a clearly unreasonable assumption to make that expenses will increase in line with movements in the consumer price index or expected movements in the consumer price index. If ultimately the court can be convinced that that was not an appropriate assumption to make, it may be necessary to adjust the damages to which Mr Jones is entitled, assuming that he makes out his case. Once again, however, I do not regard that as a reason for rejecting Mr Gwynne's report.
Orders
It follows that Mr Gwynne's report should be admitted into evidence.
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Decision last updated: 09 October 2012
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